The Bank of Jamaica (BOJ) kept interest rates unchanged on Friday as inflation subsides, but gave its clearest signal yet that interest rates may be cut soon.
The central bank said for the time being it would refrain from cutting the 7% interest rate, which it has maintained since November 2022, but would begin taking steps to make borrowing easier, given signs it is “having significant success in combating high and unpredictable inflation in Jamaica.”
Inflation has been declining for the past four months, hovering within the target range of 4-6% for the last three months, reaching 5.2% in May, which the Bank of Japan attributes to measures to curb domestic demand, a stable exchange rate, and falling imported inflation.
Officials also projected inflation to “remain broadly within our target range over the next two years, except for a few months in 2025,” as wage pressures ease and information suggests business leaders expect prices to remain stable in coming months. Overall, the central bank said these conditions would prompt it to revise down its inflation forecasts in the near term.
The improving inflation outlook was enough for the Bank of Japan’s Monetary Policy Committee (MPC) to “unanimously” agree to “begin a gradual easing of the monetary policy stance” at its meetings on June 26th and 27th.
The governor said he expects the current monetary easing to gradually reduce the amount of funds absorbed from depository institutions, which will allow banks to lend more to productive sectors and lower short-term money market interest rates.
“However, the Monetary Policy Committee has decided at present to maintain the policy interest rate at 7 percent per annum and to continue its aggressive stance of maintaining relative stability in the foreign exchange market,” the BOJ wrote.
However, they point out that risks remain, including rising international shipping costs and the possibility of worse-than-expected weather due to the La Niña weather phenomenon.
It added that if upcoming data “continues to suggest that inflation remains persistently stable within the target range, this could lead to further easing of monetary policy.”
The central bank also claimed that the tightening monetary policy it has implemented over the past three years has been “appropriate,” and praised itself for having “controlled inflation by suppressing aggregate domestic demand and minimizing the impact of imported inflation through stabilizing foreign exchange markets.”
Separately, he said the decision to keep interest rates unchanged but be prepared to lower them if conditions continue to improve was influenced by several factors.
Those factors include the economy continuing to grow, albeit at a slower pace. Stamford released final data on Friday showing growth of 1.4% in the March quarter, and the central bank said there were signs the economy was continuing to expand in the June 2024 quarter.
On the downside, it added that rising geopolitical tensions could have a negative impact on global economic growth and therefore external demand, while stronger-than-expected growth in the global economy could help improve external demand.
Attention will also be on the United States and its inflation data, which will influence the Federal Reserve’s response on interest rates in that market. The Bank of Japan usually keeps Jamaica’s policy rates slightly higher than the United States to prevent capital flight. However, the world’s largest economy is expected to see only one rate cut, as its inflation rate remained above the Fed’s 2% target at 3.3% in May and is expected to remain above this level for the rest of 2024. In addition to this, IMF Managing Director Kristalina Georgieva has recommended that the Fed should wait “at least” until the end of the year to cut rates. The United States is the only G20 economy to grow above pre-pandemic levels, and “robust” growth indicates continued upside risks to inflation, the 190-member IMF said.
“We see important upside risks,” Georgieva said at a news conference Thursday. “Given those risks, we agree that the Fed should keep rates at current levels through at least the second half of 2024.” The Fed’s current federal funds rate has remained in a 5.25% to 5.50% range since July 2023.
The Bank of Japan’s Monetary Policy Committee will meet again on August 16 and 19 to consider the stance of monetary policy and is scheduled to announce a decision on August 20, ahead of its quarterly monetary policy press conference on August 21.
